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Speeches & Presentations

The Innovation Imperative

John C. Lechleiter, Ph.D.

Chairman, President and Chief Executive Officer — Eli Lilly and Company

March 9, 2011

Event hosted by Eli Lilly and Co. and the U.S./Japan Business Council, Tokoyo, Japan

Good afternoon. Thank you, [name], for your kind introduction, and I am honored to speak to this distinguished audience. I want to express my appreciation to the U.S./Japan Business Council for co-hosting this event with us. Lilly is a long-time member of the USJBC, and we appreciate the work of the council and its counterpart, the Japan/U.S. Business Council, in promoting a positive business relationship between our two countries.

Lilly is proud to have been a part of the Japanese business community for over 35 years. Lilly Japan was founded in 1975 and today has more than 2300 employees across all areas of our business. It is a great tribute to the team at Lilly Japan that the company was ranked 9th on the 2011 Great Places to Work survey published by the Nikkei Business magazine – the only pharmaceutical company in the top 10. This marks the 5th consecutive year that Lilly Japan has been among the top 25 companies.

Lilly Japan is an important part of Lilly’s future. Japan is the second-largest pharmaceutical market in the world, and Lilly Japan is our largest affiliate outside the United States. Lilly is the fastest-growing major pharmaceutical company in Japan, with sales growth of 19 percent in 2009 and 23 percent in 2010.

We recorded strong growth across all our major therapeutic areas, including neuroscience, oncology, and diabetes. Looking ahead, we expect additional growth from three products we launched in Japan this past year. So we are very excited about the future of Lilly Japan, and I am happy to be here today.

As we meet, countries around the world … including Japan and the United States … are faced with the challenges of re-energizing our economies to expand opportunity and incomes, and reforming our health care systems to meet the growing needs of aging populations. I believe that an imperative in achieving both of these goals is innovation.

My focus today, speaking from the perspective of an innovative pharmaceutical company, will be on health care. But most of what I have to say applies to the broader economy, as well – for two reasons:

First, innovation in health care … innovation that can help our societies provide better care while holding down costs… is a critical element in addressing our nations’ economic challenges, as well.

Second, many of the policies I’ll discuss to promote innovation in health care are equally applicable across a wide range of industries to help drive economic growth.

So let me begin with a look at the health care crisis … in Japan, the United States, and countries around the globe … and the role of innovation in meeting this challenge.

The fact is, health care is a victim of its own success. Better medical care has contributed to gains in life expectancy that are unprecedented in human history. The result is that all of us who are living longer are demanding more and more of the medical innovations that have become available to us – and that’s straining health care systems everywhere.

The medicines that are the products of our industry’s research have played a major role. An independent analysis of disease data and death rates from 52 countries, rich and poor, found that new medicines accounted for 40 percent of the increase in life expectancy during the period studied … in this case, the 1980s and 1990s.

Nowhere is this gain in life expectancy more dramatic than here in Japan. Just in my lifetime – since the mid-1950s – life expectancy in Japan has increased by 16 years for men and 18 years for women. Indeed, Japanese women have held the record for the world's longest life expectancy for 25 years in a row.

There are many benchmarks to measure the success of a country, but surely life expectancy in Japan is among the most fundamental and most enviable.

At the same time, this means is that the aging of society has progressed farther in Japan than anywhere else the world … and that poses a particular challenge for this country. As of September 2010, Japan counted nearly 45,000 people over the age of 100. By comparison, the first count of Japanese centenarians, in 1963, found just 153. According to a UN survey, by 2050 Japan is expected to have 272,000 centenarians … although some predict the number could be closer to 1 million … and 40 percent of the Japanese population will be 65 or older.

As Japan ages, demand for medical care will triple in the next 25 years, according to the international consulting firm McKinsey & Co.

One key driver of increased health care costs is the rising incidence of dementia as people … and populations … grow older. A report issued last year on Alzheimer’s disease said that the global costs for caring for people with dementia in 2010 would surpass $600 billion – equal to about 1 percent of the world’s GDP. Other research has found that the direct costs of dementia care in Japan are higher than in any other country except the United States.

Yet, just as medical innovation helped bring us to this point, we are convinced that medical innovation can also help us deal with the challenge we face.

We believe that wise investments in health care innovation will be among society’s most productive investments in the years ahead, and that medicines represent the most cost-effective approach to preventing and treating disease. Without innovation, we’re doomed to more crises and ever more complicated and counter-productive schemes to handle health care costs.

In fact, there’s never been a more compelling case for the value of biopharmaceutical research and the new medicines we produce.

Innovative medicines have proven themselves time and again to be the most effective way to reduce costs and improve quality in health care.

Treatments for those diseases that remain unconquered – like cancer and Alzheimer’s disease – will most likely come from laboratories like ours.

And even when you consider the diseases we treat today – such as diabetes – there is huge room for improvement.

Let me cite just two examples that demonstrate how pharmaceuticals can reduce overall costs to society:

According to data from the OECD, over the last 40 years of the 20th Century the use of medicines helped cut in half the number of hospital admissions for 12 major diseases, including mental illness and infectious diseases.

A 2005 study of people with diabetes in the U.S. found that, as adherence with their prescribed course of medicine increased, the costs of prescription drugs rose (as you would expect), but the total cost of treatment declined significantly.

And these are just two examples. New medicines to address countless unmet medical needs could have dramatic, positive impacts not only on the quality of human life, but also on the capacity of our health care systems and the costs they incur.

Here’s a glimpse of the potential of innovation, in light of the statistics I cited earlier on the costs of caring for patients with dementia: A study in the United Kingdom suggested, if scientists develop a treatment to delay the progression of cognitive impairment … and thus reduce the percentage of older people with severe dementia by just 1 percent per year … this advance could offset all projected increases in long-term care costs for Britain’s aging population!

So finding innovative medicines that make a difference is an economic – as well as a moral – imperative.

The imperative of innovation in health care is the responsibility, first and foremost, of research-driven companies like Lilly, and we are adapting our R&D engine to rise to the challenge.

Lilly research is focused on therapeutic areas that represent some of Japan’s most important health concerns … including oncology, diabetes, and neuroscience.

Cancer is a leading cause of death in Japan, and cancer mortality has grown – a trend that will continue as the Japanese population ages.

Japan has also experienced rapid growth in type 2 diabetes, as a result of longer lives and changing lifestyles. Among the Japanese population, one in seven has type 2 diabetes or impaired glucose tolerance, and diabetes accounts for up to 6 percent of the total health care budget.

And, as I discussed earlier, Japan … like countries around the world … faces the growing scourge of Alzheimer’s disease.

In all, we have a robust and exciting pipeline of potential new medicines. But we are well aware, as you are, that our industry is in the midst of a daunting productivity problem. At a time when Japan and the world desperately need more new medicines – for everything from influenza to Alzheimer’s disease – our industry is taking too long, we’re spending too much, and we’re producing far too little.

In fact, some pharmaceutical companies are hedging their bets, reducing their focus on innovative medicines or staking their future on consolidation – raising the question I’ve been asked to address this morning.

This is not our path at Lilly.

We believe that important new medicines – increasingly tailored for specific sets of patients – can and will continue to be discovered in our labs and our global research network. And we believe that medicines with clear, demonstrable value will be rewarded with pricing and access commensurate with that value.

Ironically, the crisis in our innovation model comes at a time when we have vastly more scientific knowledge and data than ever before. But unless we change the way we do research, we won’t translate this knowledge into advances for patients. In the face of diminishing results, we can’t simply perform the same old rituals and hope for a different outcome. We must truly “reinvent invention.”

It goes without saying that we must increase the speed of research and reduce the cost to bring a new medicine to patients. Equally, we must build an understanding of patients’ needs into the earliest stages of research … assess the potential of new molecules in terms of what’s truly valued by patients, physicians, and payers … and anticipate the concerns of regulators so that we can answer their questions in our clinical testing.

I believe these goals are within our reach. The challenge of reinventing invention … the scope of what’s required … is vastly beyond what I could hope to cover today. Let me just touch on some initiatives we’re currently pursuing within Lilly.

Our newly created Development Center of Excellence employs a variety of tools, such as advanced analytics, to help increase the probability of technical success for late-stage development candidates, speed clinical trial completion, and reduce the cost of clinical research.

And, in changes we implemented last year, we redesigned our company to create a clear line of sight from innovation to the customer.

In addition, we’re pursuing tailored therapeutics to develop medicines that improve outcomes for individual patients … and thus bring more value to health care. We’re applying the growing insights of science to identify the subgroups of patients who are most likely to benefit from a medicine – as well as those who might be at higher risk of side-effects.

Tailoring is being built into virtually every drug development program at Lilly, using a variety of approaches … such as biomarkers and bioimaging … to identify differences across patient populations.

In fact, the benefits of tailored therapeutics are reaching patients today, in ways that suggest the vast and still untapped power of tailoring.

Let me give an example. Lilly’s Alimta was approved in Japan in 2009 to treat the most common type of lung cancer – non-small cell lung cancer. Research has confirmed that Alimta is particularly effective for lung cancer patients with a specific tumor cell type, called “non-squamous” … which can be easily determined from a biopsy of tumor tissue.

Knowing the patients who are most likely to benefit from Alimta – and those who are not – holds the promise of better outcomes for patients, and more value for the health care dollar. With Alimta, the “tailoring” happened after launch. Going forward, we want to build this in at the earliest stages of development of potential new medicines.

And the imperative to reinvent invention extends well beyond our walls. In fact, the changes that are absolutely essential for companies like Lilly are transforming the research-based pharmaceutical industry into one that is more networked … global … and entrepreneurial than ever before.

Over the last decade, Lilly has been transforming itself from a fully integrated pharmaceutical company, or FIPCO – meaning we owned every part of our value chain – to a fully integrated pharmaceutical network, or FIPNet. We’re using FIPNet to build additional R&D capacity and capabilities that leverage what we do well, while attracting molecules, funding, and expertise from partners. Through FIPNet, we can share investment, risk and reward. And we can more easily operate around the globe, and around the clock, to get work done more efficiently.

Of course, FIPNet is not an entirely new phenomenon. We have long had successful alliances with Japanese companies such as Shionogi, Takeda, and Chugai, and we continue to have a number of outstanding Japanese partners including … to name just a few … Daiichi Sankyo, Nippon Shinyaku, Kyowa Hakko Kirin, and most recently Kowa.

But today we are also applying the FIPNet concept in new ways that are truly transforming the work of invention. Let me offer one example … a virtual drug development network that we call Chorus.

Chorus was established in 2002 as a small, cross-disciplinary group of Lilly scientists that designs, oversees, and interprets early-stage development work through a network of organizations outside Lilly. Using this approach, Chorus has been able to manage some 15 molecule programs at a given time with a dedicated staff of only 29 scientists … and to reach clinical proof of concept about 12 months earlier and at half the cost compared to the current industry model.

The success of this strategy has led us expand the Chorus model. At the same time, we’re working with venture capitalists to create investment funds that will enable the acquisition of promising molecules, using Chorus to advance them to clinical proof of concept. And we aim to do so in three years at an average cost of $10 million or less per molecule – a speed and cost comparable to the best biotech companies. The first two molecules – one from Lilly’s internal pipeline and one from an external source – are currently in development.

In consideration for our investments of time and capital, Lilly will receive preferential access to molecules developed by the funds. We refer to this R&D strategy as our “Mirror Portfolio,” anticipating the creation of a “mirror image” of Lilly’s internal early-stage portfolio with externally funded molecules whose development we can impact.

Our Mirror Portfolio strategy is just one example of a broad range of initiatives that research-based companies like ours must pursue to rebuild our R&D engine … and achieve the imperative of innovation.

Even as we rebuild our R&D engine, we must help build an environment where pharmaceutical innovation can thrive. As pressures on health care systems around the world continue to grow, we will continue to make the case that innovation is imperative, and to advocate for reforms that promote innovation rather than penalize it.

The Japanese government has taken a positive approach in its New Growth Strategy by recognizing the value of innovation in providing health security to an aging society. And I am pleased that health care, including pharmaceuticals, has been designated by the Government as one of Japan’s key growth sectors. Indeed, some of the world’s top medicines are products of Japanese R&D, and Japan is a world leader in patents across all fields.

A company’s ability to pursue innovation … in any field … requires that governments maintain solid protection of intellectual property; a fair, rigorous and transparent system of regulation; and a predictable tax structure that allows us to plan and invest for the future. Again, I would cite the Government’s New Growth Strategy, which calls for strengthening the competitiveness of companies operating in Japan by reducing the effective corporate tax rate to levels seen in other major countries.

Policies that support innovation are especially important to the pharmaceutical industry. We invest more of our revenues back into R&D than any other sector.

The science is advancing rapidly, and the industry’s pipeline of potential new medicines is growing … with a 15 percent increase in company-reported projects in the clinic in just the past five years. At Lilly, we have the largest pipeline in our history, with nearly 70 potential new medicines in clinical development.

At the same time, drug development is becoming more challenging and risky, so it is important to have appropriate opportunity of reward in order to sustain the innovation cycle.

We at Lilly are working with regulators and policy makers in both Japan and the United States to improve the R&D process, in order to reduce review times for potential medicines, while ensuring patient safety. And in all these areas, we hope to contribute to harmonizing the policies of our two countries.

Since 2006, the Pharmaceuticals and Medical Devices Agency, the regulatory authority that oversees clinical trials of new health care products in Japan, has allowed Lilly to add several clinical research sites in Japan to a global trial of one of our products. Previously, regulators had not regarded global trials, even with Japanese participation, as sufficient basis for approval of a new drug in Japan. This policy helps to reduce the costs of completing clinical research in Japan for new drug approval and, even more importantly, it has allowed us to reduced delays in bringing new medicines to Japanese patients.

Lilly and the USJBC welcome the Japanese Government’s efforts to establish Clinical Trial Centers to improve the efficiency of clinical research in Japan. We support efforts to make it easier for companies to include Japan in early investigational clinical trials. And we encourage the PMDA to continue to accept multinational clinical trial protocols.

We’re also advocating policies to enhance intellectual property protection. In particular, Lilly supports the position of the USJBC in recommending that Japan extend the data exclusivity period for biologics to 12 years … consistent with the exclusivity period adopted in the United States as part of the health care reform legislation enacted last year. This is an important incentive for bio-pharmaceutical R&D.

And lastly, Lilly joins the USJBC in welcoming the Japanese pricing reforms adopted in April 2010, which provide for price stability over the life of a patent or exclusivity period. Japan's drug lag has resulted, in large part, from a biennial price reduction system that has until recently been applied to all medicines. Appropriate pricing levels during a product’s patented life allow companies like Lilly to recoup some of the high costs of research and development, and make the investments necessary to bring forth the next generation of innovative medicines.

Coupling the new system with measures to increase the use of generic drugs makes sense … not only because it makes it possible to introduce the new system on budget-neutral basis … but also because it induces pharmaceutical companies to shift toward a more R&D-based business model. Over time, I believe that this pricing policy change will help ensure that Japanese patients have prompt access to the world’s most advanced medicines.

With the USJBC, we urge the Government to make this pilot project a permanent reform of the pricing system in 2012 and to review other rules in the Pricing System that hinder innovation. In particular, I would urge reconsideration of the market-expansion re-pricing rule, which significantly reduces prices upon increased sales and addition of new indications. This rule has a considerable negative impact on incentives for new drug development, especially for additional indications which address unmet medical needs of smaller patient populations.

We will continue to work closely with our colleagues in industry, as well as regulators and policy makers in government, to promote policies that support innovation and help achieve society’s goals for better health care and economic growth.

[Long Pause]

Innovation is not a panacea for the challenges facing our economies and health care systems, but it is hard to see any way out of the current crisis without innovation.

At Lilly, we’ve made an unequivocal commitment to innovation. To sustain the investment necessary to develop more new medicines, we advocate policies that allow us the opportunity to earn a return on the innovative medicines we bring to market.

But, first, we must successfully develop medicines that truly create value … that alleviate unmet medical needs and improve outcomes for individual patients. We must discover and develop innovative medicines that make it possible for Japan … along with societies around the world … to meet the growing health care needs of your aging citizens while maintaining economic prosperity and opportunity for all your people.

More than 30 years of experience in the industry tells me we can do this. For the sake of patients here in Japan and around the world, we must do this.

Thank you for your kind attention. I would be pleased to respond to your questions, and I welcome your comments.